Dam spanning the Yangtze River. But so compelling was the demand for cement and steel then that makers of the two materials in many cases overlooked their responsibility to restrict carbon dioxide emissions within prescribed limits, did not pay attention to employing environment friendly and state- of-the-art technologies and put product quality at a discount. But China has now started behaving like a responsible global citizen.
The proof is there in the recent pronouncement by the Chinese Ministry of Industry and Information Technology that
World cement and steel makers look at India as the next major centre for capacity creation with growth moderating in China under official direction, writes Kunal Bose. But before turning to India, a close look at China is called for. The hyper capacity growth of the two construction materials in China for most of the past two decades got much to do with Beijing giving a thrust to building a strong infrastructure that will make the country a ‘factory for the world.’ Remember the demand made on cement and steel industries while the country was getting ready to host the 2008 Olympics and completing The Three Gorges the way forward for the world’s largest cement industry will be shutting down “outdated production facilities” responsible for pollution and a stumbling block to technology advancement in a large capacity block. Following a review of technology status of and propensity to cause pollution by individual operating units in the Chinese cement industry, the Ministry has mandated the elimination of 250mt (million tonne) of capacity by 2015. Alongside, CO2 emissions per unit of industrial value of the commodity will have to be brought down by 17%. China industry watchers are all full of praise for the Ministry move. At the same time, they remain doubtful if the edict could be implemented in full. Such is the corruption level at the province level where politicians and bureaucrats have mastered the art of asserting their independence without offending Beijing that many cement manufacturers guilty of environment pollution will manage to escape the official dragnet. In fact, it is because of the liberty that industry can take at provincial level by greasing the palms of politicians and bureaucrats that China’s progress in dismantling polluting and energy inefficient archaic steel mills falls way short of the target. The same can happen with cement.
In yet another respect, China is trying to do with cement some years after it saw the merits in consolidating steel capacity. According to the twelfth five-year plan for the building materials industry, the largest ten Chinese cement companies should take actions for them to account for 35% of the national output by 2015 compared with about the present 25%. As for steel, Beijing wants the first ten to own 70% of the industry’s capacity from less than 50% now. Capacity consolidation leads to economies of scale as it creates ideal condition to cut costs and growth through the organic route. With China rationing power supply
and simultaneously charging more for electricity to energy intensive industries like cement, steel and aluminium, manufacturing units are desperate to cut costs. Capacity consolidation facilitating introduction of power saving manufacturing processes will be of major help to cement mills which in less than a year have seen costs spiralling to record highs. Retail cement prices have risen to over 400 yuan ($64) a tonne in less than a year.
Interestingly, while Chinese cement output grew 11.7% to 2.09 billion tonnes in 2011, investment in new capacity building dropped 8.3% year-on-year to 143.9 billion yuan for the first time in five years. Investment slide comes in the wake of government policy reorientation to curb speculative investment in real estate. Where then is the Chinese cement industry heading? Official papers show that domestic demand for the building material will be growing annually from here at a much slower pace of 3–4% to reach 2.2bn tonnes by 2015. It is noticeable that China, as it goes forward, will be making its economy less reliant on fixed asset investment and more on technologies, services and consumption. Some rapid fall in property prices will confirm the success of speculation discouraging steps like barring individuals from buying a third dwelling unit and obliging them to make much higher down payments for property purchases. At the same time, cement makers will be deriving some solace that China is settling down to single digit growth sparing itself the much feared hard-landing and development commitment of the country’s interiors and western region remains intact. When growth slows down, expect the country’s cement equipment makers to scout for orders in emerging and developing countries for building plants.
For example, the state owned China National Materials Group Corporation (also known as Sinoma) has recently built a 6mt cement plant at an investment of over $1 billion for a Nigerian group at Ibese in southwest Nigeria’s Ogun state. The biggest cement factory in sub-Saharan Africa will make Nigeria an exporter of the building material. The Nigerian work that Sinoma has done is more than a business deal. This and also many of its other ventures in Africa, including the continent’s most disturbed regions are part of the Chinese strategy to spread its spheres of influence.
 
EURO ZONE DIFFICULTIES
In the meantime, the continuing economic difficulties in Euro zone and US failures to gain any significant growth traction has led research group IHS to say that global construction spending this year will grow at a somewhat tepid pace of 4.9%. No one is ruling out the possibility of revival of sovereign debt problem in some parts of Euro zone leading to a mild recession. Hasn’t investment guru George Soros said that the “Euro crisis is getting worse. It’s not over yet, and it is going in the wrong direction.” That will prove to be hurtful for the construction industry and therefore, for cement demand. IHS says in its Global Construction Outlook report that construction spending will grow at a compound annual rate of 4.7% till 2015 to return to moderately strong growth thereafter. But expect some large use of cement as the Panama Canal is expanded, Japan and New Zealand get along with reconstruction called for by earthquake damage, China remains committed to building a nationwide strong infrastructure and countries in the Middle East, Europe and the US create new large sports venues.
The common wisdom in the world cement industry is that future capacity and demand growth will come from emerging countries like India, Russia and Brazil and developing countries in Africa and South America. In all such places, governments are putting emphasis on infrastructure development as urbanization gains in pace and per capita income rises. All this translates into incremental demand for cement and other construction materials. A Delhi-based official of Cement Manufacturers Association (CMA) says,“India is the world’s second largest cement manufacturer in terms of capacity and production. But the capacity difference between the world leader China and India is so huge that we could only aspire to bridge the gap to some extent.” The unbridgeable capacity gap in cement and also in steel has occurred mainly due to China stepping out early to build a strong infrastructure to offer logistical support to the manufacturing industry. The chairman of the Steel Authority of India Limited Chandra Sekhar Verma is, however, hopeful about the future. He says,“the proposed $1 trillion investment in strengthening infrastructure during the 12th plan (2012-17), launched this month will generate massive demand for steel and other construction materials, including cement. The challenge now is to create capacity, which is cost effective and incorporates frontier technology, at a rapid pace without getting unsettled by occasional surplus situations.”
 
INDIAN STRIDES
Take the case of cement. According to 11th plan, India was to have capacity of 298mt by March 2012. However, the attained capacity was 323mt leaving the industry to nurse much idle capacity. In the five-year plan period ended March, the Indian cement industry invested around Rs500bn ($10bn) to create new capacity of 150mt. A Planning Commission official says the country’s cement capacity will be ramped up to 479mt by March
2017, the terminal point of the current twelfth five year plan. The basis of projecting such cement capacity growth is the assumption of 9% annual GDP growth — incidentally, India fared this well and better in the recent pre-recession time — and cement and steel demand rise is generally a couple of percentage points ahead of GDP growth rate.
At the same time, there have been periods when cement demand growth sputtered. Like demand rise fell to 4.9% in 2010/11 and further to 3% in 2011/12 after recording an encouraging annual improvement of 10.5% during 2004–10. But as it happens with any commodity, specially the globally traded ones, cement has its cyclical ups and downs. The immediate past president of CMAVinita Singhania says,“the cement industry is in the midst of a cyclical downturn. While there has been significant capacity expansion, demand growth has slowed.”
Dark clouds have now, however, started disappearing from the cement industry’s horizons. Cement producers are seeing demand improvement, albeit moderately, since February. Capacity use has crossed 80%. The remarkable thing about the Indian cement industry, which still offers much scope for consolidation with a good number of groups owning 2mt to 10mt capacity, is the exercise of production discipline allowing it to pass on incremental costs on account of coal and power mainly but also for other inputs to consumers.
Upward revision of local excise duty also added to the cost of building material in the hands of consumers. Production discipline should continue to be the watchword for the industry in India and also in many other places, including China as consumer demand will take time to catch up with capacity. Take the case of India where capacity by March 2013 will be ahead of demand by close to 100mt. The industry in India has come to a stage where entry barriers for aspiring new players have become high and therefore, capacity expansion has come to rest with the existing groups.
But excess capacity staying with the industry for quite some time is not found to be a deterrent for world cement majors to continue to hunt for mills that may be on sale in India. Of all the foreign cement groups in operation here by way of acquisitions, Holcim has done the best. In quick succession, it acquired ACC and Ambuja Cements, among the Indian industry leaders and got them seamlessly integrated with Holcim industrial practices. LaFarge, Italcementi and Heidelberg continue to grow their profile in India. Answering a question as to why all of them are still keen to acquire cements assets here in the prevailing situation of overcapacity, industry analyst Rajeev Talwar says, “the World Bank has in a study has put housing shortages at up to 70m residential units. Remember housing in India accounts for 67% of cement demand. Demand from this segment will become stronger in the event of deficiencies in our financial systems are eliminated to create long-term funding opportunities for property developers.” Infrastructure has a 13% share in cement use, commercial construction 11% and industrial sector 9%. Foreign cement companies could take the short-term overcapacity blues in their stride and wait for demand surge as large numbers of cement intensive housing and infrastructure projects get launched at regular intervals during the current plan period. Moreover, there are signs of the economy in general looking up with many of the supply side issues getting sorted out. Freight is a major issue with a bulk item like cement and therefore, it is essential in a big country like India that cement capacity is more evenly distributed than now. In fact in the eastern part of the country where many steel mills are located, there is ample scope to make cement using fly ash and slag. Some progress has been made in this direction but a lot more needs to be done.
As cement producer India is several times bigger than Pakistan which has nameplate capacity of 44mt. The fact, however, is Pakistani domestic demand at this point could take care of 70% of the industry’s production and the rest must be exported. And what could be a better market for the commodity than the contiguous India. The point remains even while Pakistan is enjoying ‘Most favoured Nation’ status vis-a`-vis India since 1996, it has not made much headway in exporting cement to its neighbour. This is despite Pakistani cement enjoying cost advantage over India. Until such time, Pakistani cement could find its way into India through the land route, exports will perforce remain limited. Indian producers burdened with surplus capacity remain wary of Pakistani cement crossing border by land.
 
 
Brazilian cement consumption to rise this year due to infrastructure boom
After a relatively poor year in 2011, when 4mt (million tonnes) more cement was used in Brazil than the 64mt of 2010, an increase of 7%, the 28 groups which own 78 plants dotted around the country anticipate making more than 9% more this year, an extra 6mt, writes Patrick Knight.
While the Brazilian economy grew by less than 3% last year, when priority was given to getting inflation under control and government spending was cut back, growth is expected to exceed 4% this year. Priority is to be given to improving Brazil’s creaking
infrastructure, which is adding to the cost of exporting, particularly of bulk products such as grains and oilseeds, sugar, iron ore and steel.
Hundreds of kilometres of new railway track are to be built, as are dozens of new tunnels and bridges, while much of the existing track is being upgraded to allow trains to run faster.
Thousands of kilometres of highway are to be upgraded with bridges and viaducts being repaired or re-built, more than a dozen airports will be expanded, including building new runways, patios and terminal buildings. Several ports are to be upgraded, and a start is to be made in building several very large new ones, most of them to cut the cost of exporting bulk goods.
A start will soon be made on building Brazil’s first high speed line, to link Rio de Janeiro and Sao Paulo. A total of 130km of the 450km of track will either be in tunnels, or on viaducts, so large quantities of cement will be needed.
More than a million low cost houses are to be built this year, while the growth of the economy means thousands of new apartment blocks, as well as offices, will be needed.
With the next World Cup competition to be held in Brazil in just over two years time, and with the Olympic games to follow two years later, demand for cement will grow fast. Each Brazilian now uses 500kg a year, much more than the 300kg of five years ago, but still well below the international average.
Flush with $1.4 billion of cash from the sale of its share in the Usiminas sheet steel mill to the Italo–Argentine Techint, market leader Votorantim, which can make more than 20mt of cement at the 22 mills it operates in 15 of Brazil’s 27 states, aims to add more than 12mt to capacity in the next few years.
It is to make a start on building four brand new mills this year and output will be increased at several others. Two million tonnes of extra capacity are to be added at a mill near Curitiba, capital of Parana state, already the largest cement plant in Latin America and which, when completed, will be one of the world’s largest.
Cement was responsible for 45% of the $14 billion sales of the Votorantim group last year, ahead of metals, pulp and the ‘long’ steel products, such as the re-enforcing rods used mainly by the construction industry.
As well as its plants in Brazil,Votorantim owns cement mills in the United States, and has a share in plants in Argentina, Uruguay, Chile, Peru, Bolivia and Paraguay, with plans to increase production at many of them. A completely new mill is to be built in neighbouring Uruguay, where Votorantim says costs, both of labour and energy, are lower than in Brazil.
Two years ago,Votorantim and the Camargo Correa construction company, industry leader in Argentine, where it has a 50% share of the market, bid jointly for 50% of the shares of
the Portuguese Cimpor company, which now makes 4.5mt at the six mills it owns in Brazil.
One of the big attractions of Cimpor is that it has plants in numerous fast growing countries in Africa and the Middle East, as well as in Europe. Camargo Correa is now bidding for full control of the company, although this may attract the attention of the monopolies commission.
Weak demand in the developed world has prejudiced the two other large international companies with a major presence in Brazil, the Swiss-owned Holcim company, able to make 3.7mt in 2009 at the five plants it owns in four states and the French owned Lafarge, with capacity to make 2.5mt at the nine plants it owns in six states. Both companies plan expansions which will allow them to maintain their present share of the market.
Five of the leading companies,Votorantim, Camargo Correa, Cimpor, Holcim and Itambe, in which Votorantim also has an interest are between them responsible for 80% of the cement made in Brazil last year.
The Brazilian equivalent of the Monopolies Commission, Cade, has alleged that agreements between most of these companies not to compete on price in markets where the others were strong, which may have led to purchasers paying up to 9% more than they needed for their cement, indicate that the companies have been operating a cartel.
Cade worries that the largest groups have more than 20% of the market in most of the states where they operate, so competition is limited.
The giants are also accused, together with various trade associations, of buying up fast growing smaller companies when they threaten to lower prices and increase competition.
Brazil’s second largest manufacturer of sheet steel, the CSN group, which also bid for the Usiminas sheet steel company last year, has itself started making cement.
It is making use of some of the millions of tonnes of clinker surplus at its mills to make 2.8mt.
CSN bid $5 billions for Cimpor two years ago, but was outbid by Votorantim and Camargo Correa.
CSN also bid for the Usiminas steel company, but Votorantim and Camargo Correa decided to sell their shares to Techint instead of to CSN, the main reason being apparently being to prevent CSN expanding in the cement industry and becoming a threat to them.
As well as building plants and investing in neighbouring countries, the Camargo
Correa group, now the world’s 35th cement company by sales, is building a 1.5mt plant in oil-rich Angola, an important trade partner of Brazil. Camargo Correa says it aims to be the world’s 20th largest in the near future and that to allow this to come about, it plans to bid for another large company, possibly Cimpor.
In recent times,Votorantim, has sold its interests in sheet steel, but has also disposed of assets in the frozen orange juice sector and some other chemicals, having decided to concentrate on cement, cellulose, metals such as aluminium and the bauxite and alumina used to make it, as well as zinc.